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Holtz-Eakin and Roy: The Critics Are Wrong About the Future of Free-Market Health Care Reform

by Avik Roy

February 22, 2013

Source: Forbes

Earlier this week, the two of us—Douglas Holtz-Eakin and Avik Roy—published an op-ed for Reuters in which we outlined a market-based plan for entitlement reform and universal coverage that builds on a reformed version of Obamacare’s subsidized insurance exchanges. The piece generated a lot of media reaction, both positive and negative, so we felt obliged to respond to our critics. Is free-market reform a “surrender” to Obamacare? No. Are we ignorant of the policy issues associated with a Swiss-style regulated, subsidized insurance market? Hardly. Consider this piece our all-purpose rebuttal to Matthew Yglesias, Paul Krugman, et al.

The Swiss paradigm

As a reminder, the basic framework that we advocated—one that Avik has also discussed at National Review and Forbes—involves first making substantial reforms to Obamacare’s exchanges. We seek to reduce the cost of insurance on the exchanges, expand consumer options, and improve the exchanges’ fiscal sustainability. After we reform the exchanges, we can gradually migrate the Medicare and Medicaid populations onto the exchanges, by slowly raising the eligibility age for Medicare, and reducing the income threshold needed to gain eligibility for subsidized coverage.

The end result would be a health-care system that resembles a slightly less-regulated version of Switzerland’s. Swiss government entities spend 60 percent less on health care than American ones do, and yet Switzerland enjoys universal coverage, timely physician appointments, and broad access to the latest medical technologies. (For more on the Swiss health-care system, see Avik’s lengthy write-up from 2011 and this edited excerpt from Regina Herzlinger’s study of the system.)

Liberal gloating is premature

The first set of commentary about our op-ed wasn’t so much focused on the policy aspects of the proposal, but more a political celebration of our acknowledgment that Obamacare is here to stay. “Obamacare is winning,” announces Ezra Klein. “Gone is the millennial struggle to preserve the dying embers of freedom,” exults Jonathan Chait. “From me, no gloating, no ‘I told you so,’ no smugness. Instead, I feel appreciation for common sense overtaking extremism and myopia,” says John McDonough. “This isn’t an alternative to Obamacare,” chortles Matthew Yglesias. “It’s a negotiated surrender.”

It’s hardly that; Ed Kilgore is more on the mark in describing it as a “strategy…that sells itself as a reform of the post-ACA health care system instead of a restoration of the pre-ACA status quo ante.”

Yglesias claims that in 2009, Democrats were open to something resembling our framework, and only Republican intransigence prevented such an outcome. (David Frum joins in to say “I told you so.”) This is demonstrably false. Democrats would have never gone along with applying the exchanges to Medicaid—and especially Medicare—in exchange for Republican acceptance of Obamacare. Indeed, as John McDonough has documented, Democrats balked on accommodating modest Republican ideas because they would have cost 10 to 15 Democratic votes on the bill.

Yglesias says that Democrats should only go along with free-market reforms if they get something in return, like “introducing a reasonably strong public option” or “higher taxes.” But his negotiating strategy ignores an important point: our free-market roadmap involves a substantial redistribution of wealth, because it takes subsidies that now go to wealthy retirees, and redirects them to the poor.

Remember that Obamacare doesn’t achieve universal coverage. Even after Obamacare is fully implemented, there will still be 30 million uninsured Americans. By contrast, the market-based approach that we propose would achieve truly universal coverage, while improving the health outcomes of the poor, by replacing Medicaid with a more generous form of health insurance.

If Democrats want to stand in the way of such a proposal out of partisan spite, that’s their choice. But it’s not a morally or politically riskless choice.

The extraneity of community rating

Paul Krugman thinks that he has found a “gotcha” moment in our proposal because we believe that Obamacare’s community rating provision should be replaced. Aha! says Krugman. “Switzerland has community rating…Maybe Holtz-Eakin doesn’t know anything about this—but wasn’t Roy supposed to be a conservative expert in this field? Are they really unaware of the basics here?”

Yes, we are aware. (A simple Google search might have helped Prof. Krugman look into this.) Community rating is an undesirable feature of both Obamacare and the Swiss system, and hardly essential to either, as any actuary will tell you. By forcing twenty-somethings to pay two to three times what they should pay for health coverage, community rating creates adverse selection. It encourages young people to drop out of the system, leaving only older and sicker people in the risk pool, and driving up the cost of insurance for everyone else.

There is an obvious alternative to community rating as practiced by Switzerland and Obamacare: require insurers to charge the same rates to those within a specific birth year, regardless of gender or prior health status. The vast majority of the variation in health risk is accounted for by age; eliminating age-based community rating would do much to counteract the incentives for adverse selection that are contained in the Obamacare exchanges. Remember that Obamacare’s individual mandate, the thing that is supposed to force young people to buy overly costly insurance, is quite weak.

In our approach, all 24-year-olds might pay the same rate for actuarially equivalent insurance. But that rate would be much lower than the rate that all 41-year-olds would pay, or that all 62-year-olds would pay. That’s a fairer, less expensive, and more economically sound system than what both Obamacare and Switzerland impose.

Krugman complains that Switzerland spends a lot on health care—which is perfectly normal for a wealthy country—and he confuses overall national health expenditures with public health expenditures. Conservatives are particularly concerned about the growth in government health spending, because we are committed to ensuring that America remains solvent. As I describe here, and in the chart below, Switzerland and Singapore are far ahead of the U.S. and western Europe on this score. In 2010, U.S. government entities spent $3,967 per capita on health care. Switzerland spent $1,628. In 2009, Singapore spent a mere $762.

And Krugman’s attack on the Swiss system is particularly hilarious, given that, as he acknowledges, in 2009 he wrote that “a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work.”

No, Switzerland is not a libertarian utopia

In fairness to Paul Krugman, his post on our op-ed is, in effect, an uncritical regurgitation of ones by Josh Barro and Aaron Carroll that are similarly snarky—and similarly flawed.

Strangely, Aaron claims that private non-profit insurers in Switzerland are “closer to a ‘public option’ than anything we have.” No one who follows the insurance industry would agree.

Indeed, the United States has plenty of non-profit insurers—Blue Cross Blue Shield, most notably—and their conduct in the marketplace is far closer to that of the for-profit insurers than it is to government payors.

Aaron claims that “there is no ‘public option’ here” in the United States, which ignores the fact that more than 100 million Americans will soon be enrolled in the “public option” systems of Medicare and Medicaid. A la Krugman, Aaron wonders if we are aware that Switzerland has an individual mandate and that Switzerland heavily regulates its insurance products. Indeed, as Avik has noted in the past, Switzerland is no libertarian utopia:

Naturally, such a system will not be attractive to those who implacably oppose the idea of a private health-care sector. But conservatives will also find objectionable elements to the Swiss system. In important ways, the Swiss system resembles that of Massachusetts and PPACA. The Swiss have an individual mandate. The government defines the minimum benefit package, which has been subject to expansion from special-interest lobbying, and is more comprehensive and less consumer-driven than it could be. The government has enacted Medicare-style price controls for hospital and physician reimbursement. Insurers must charge similar rates to the young and old (“community rating”), must cover pre-existing conditions, and must operate as non-profit entities. Princeton economist Uwe Reinhardt describes Switzerland as “a de facto cartel of insurers and health care practitioners who transact with one another in a tight web of government regulations…”

An American adaptation of the Swiss system would not require an individual mandate: there are market-based alternatives for avoiding the “adverse selection death spiral,” such as requiring those who opt to forego insurance to wait a few years before buying insurance again. Ideally, the American version would give insurers a lot more latitude to come up with innovative plan designs, so that insurance could remain inexpensive, while reflecting what consumers actually want. Also, the Swiss system’s goal of preventing individuals from spending more than 10 percent of their income on health insurance exposes the system excessively to health cost inflation; instead, the U.S. would be better off adopting a defined-contribution system, like the one proposed by Paul Ryan, in which insurance subsidies grow at a pre-defined, sustainable rate.

Indeed, the fact that both liberals and conservatives would find objectionable elements to Switzerland is a large part of its appeal. It achieves the policy priorities of liberals (universal coverage; regulated insurance market) and of conservatives (low government health spending; privately-managed health care). Both sides could declare victory, and yet also have plenty to complain about.

In other words, Switzerland provides the contours of a bipartisan solution: one that stands a chance of gaining more than 60 votes in the Senate.

Finally, Aaron says that he would applaud anyone who offered exchange-based coverage to the Medicaid population; he implies our plan does not, when in fact that is one of its core features: a serious misrepresentation on his part.

Criticisms from the right

Finally, we should mention criticisms of our approach that come from the right. John Goodman, one of our favorite writers on free-market health care, puts it this way:

Several studies have found that the most egalitarian health care system in the whole world is the Swiss system. So during the debate over HillaryCare and ever since, it’s always been a mystery to me why our friends on the left have talked about the German system, the French system, the Canadian system—anything but the Swiss system.

Then Regi Herzlinger discovered that whatever its faults, the Swiss system looked relatively good—individual ownership of insurance, portability, competition, private sector institutions, etc. More recently, Doug Holtz-Eakin and Avik Roy endorsed the Swiss system as the ideal reform…

Bottom line: the Swiss system is managed competition and it doesn’t work any better than managed competition works for federal employees or for state employees or any better than it will work in the ObamaCare exchanges. This is much ado about nothing.

We agree with John’s view of the ideal system: universal health savings accounts combined with catastrophic coverage. He writes compellingly about South Africa’s system in this regard. Avik has written in the past about Singapore, which blows away Switzerland on cost-efficiency by instituting universal health savings accounts. But John is making a mistake if he holds out for universal HSAs, at the expense of more politically feasible, market-oriented reforms that expand coverage and reduce federal spending.

Otto von Bismarck once said: Die Politik ist die Lehre vom Möglichen. Politics is the art of the possible. A system with universal coverage, individual choice, and fiscal sustainability is within our reach. It would be far better than the system we have now. Isn’t it worth a try?

Douglas Holtz-Eakin, the co-author of this article, is President of the American Action Forum. He served as director of the Congressional Budget Office from 2003 to 2005, and as chief economic policy adviser to John McCain in 2008. You can follow him on Twitter at @djheakin.

Follow Avik on Facebook and on Twitter at @aviksaroy.

UPDATE 1: John Goodman responds:

All over the developed world the market for health insurance has been so completely suppressed that you can find a real price for health insurance almost nowhere. In the U.S., BlueCross and other private insurers administer Medicare. They also administer private health insurance. Earth to the left: BlueCross is not good when it is called “Medicare” and evil when it is called “private insurance.” BlueCross is just BlueCross…

Like so many of our friends on the right this focuses on form at the expense of substance. What is needed is a real market for medical care and a real market for health insurance. Not only is this feasible, it is the only thing in the long run that will work.

All these things would be great. And we should pursue reforms in this direction. But there is no advanced democracy in the world that has them, to John’s point, which should be at least one indication of their political feasibility.

UPDATE 2: Paul Krugman says he “wasn’t nearly hard enough on us,” in retrospect. The thrust of his complaint is a debate about the scale of Swiss public spending on health care. He cites an OECD figure that Swiss public health-care spending is 7.4 percent of GDP. We’re glad Krugman brings this up, because the OECD figure is due to an accounting oddity of theirs, as Avik explains here:

The OECD puts Switzerland high on the league tables in terms of government health spending, but that is due to a statistical anomaly. Switzerland has an individual mandate; the OECD defines state health expenditures to include insurance premiums that the government requires individuals to pay, even if that spending is on private insurance. That is a debatable approach from the OECD, because the spending goes directly to the insurers, without the government as a redistributor.

Based on figures compiled by Paul Camenzind for the Commonwealth Fund, actual Swiss public spending—excluding privately-paid insurance premiums—is 30.9 percent of national health expenditures. According to the OECD, overall Swiss health expenditures in 2010 were 11.4 percent of GDP; 30.9 percent of 11.4 percent is 3.5 percent. This is a more accurate comparator to U.S. public health spending.